Fellow Klimates,
As a non-crypto person, it took me some time to understand (at least some of) the details behind Klima DAO and what happens under the hood.
Below I want to share my research and understanding of this with the hope that it helps others and saves them time. It will be based on busy pictures and less text.
If you are completely new to Klima DAO, better start with this.
Obligatory disclaimer: this is not financial advice, I am not a financial advisor, please DYOR and remember that this is a very early stage crypto project, which can fail in many ways imaginable and you can lose 100% of your money.
If you are not discouraged so far, read on.
First, a reminder what happens first from the perspective of a new Klima user who wants to participate and invest.
Any new investor needs to buy BCT or provide liquidity and bond in order to get KLIMA. You can also buy directly on Sushi at full price, but bonding offers a discount to the market price.
What happens at the DAO when people bond?
Here is my “translation” of the code mechanics into a financial explanation that makes more sense to me if I view Klima as a business and the below as a simplified “Profit and Loss Statement”.
This chart uses arbitrary numbers.
Try to read the above as a financial statement of a business, it will start to make a bit more sense. Gross revenues is what comes in as a result of the market price premium of Klima. The “cash cost” is paying stakers and the DAO cut is like a “non cash item” because no BCT is “consumed” for minting it, hence it does not decrease the Gross Profit. The 10% DAO cut can be perceived as a dilution item (more on this later).
The DAO budget is used to pay contributors for their work for the DAO the way I understand it (read more about it in the Dilution section below). As of today, the DAO has accumulated a war chest of ca. 11,000 KLIMA worth $4.2m at current market prices.
All clear? Good, now check the same thing, but using real data from the 12.12.2021.
All data comes from the official Klima DAO Dune dashboards — here and here.
This already feels too much, apologies, I am not the best in converting data to pictures.
Dilution
Dilution is paramount to understand with Klima DAO, because the DAO runs on minting new KLIMA and paying staking rewards. There are three things we all should know:
- Own KLIMA, but don’t stake: you get exposed to the full force of dilution and your share in the total KLIMA will be reduced dramatically over time due to the massive APY. Imagine if you are an investor in a startup and the founder issues new shares every single day without you participating. Over time, your stake will be worth a fraction of the initial value.
- Own KLIMA and stake. Great, you are keeping your share in the total supply. Almost.
- Dilution from bonding: bonds are the natural way for the DAO to acquire BCT so we can’t do without them. They work with discounts to the market price. That means that every time you buy 1 KLIMA, you pay just a bit less than the market price. This is a necessary evil for the DAO to operate and incentivize people to part with their BCT and liquidity pool tokens. The side effect is that the discounts dilute everyone else by a small amount. The DAO team is well aware of this and manage the bonding capacity in a way to optimize the trade off between incentivizing the accumulation of new assets and not affecting the stakers too much.
- Dilution from DAO’s take: as you’ve seen above, they automatically mint new KLIMA = 10% of every new KLIMA issued to bonders. It is important to understand that this is not directly backed by the BCT at the bonding price, rather it is implicitly backed because the bonding revenue is high enough to cover this additional minting. This newly created Klima are set aside for the DAO operations, paying contributors, running business development, incentivizing partners etc. It generally sits idle in an account and does not affect circulating supply and is not staked. It is only when it is paid out that it enters circulation if the recipients stake it. Then we all get diluted a bit, but the idea is that this hopefully comes with benefits for the DAO and an increase in its value.
- pKLIMA issuance: The idea is that the team, advisers, stakeholders and OlympusDAO own something like “founder tokens” which have a strict vesting schedule and are limited to 15.8% of the total supply. Anyone who exercises pKLIMA needs to bring in BCT into the treasury. Why dilution then? Well, they need to bring in 1 BCT per 1 KLIMA compared to the current market bonding price of ca 65-70 BCT per KLIMA. So far, 59,501 pKLIMAs have been minted, which corresponds to ca 6.1% (meaning that some people can exercise, but haven’t done so).
It can get complicated with all of the different pKLIMA, aKLIMA, KLIMA. The team has written a long post about them here. As a rough heuristic, you can imagine the following pecking order:
pKLIMA: earliest backers (ca 80 investors) invested to kickstart the DAO and pay the core team and setup. This is like an angel pre-seed round in a startup. They paid the least per KLIMA as they carry the highest risk. I’m not sure what price per KLIMA they paid. There has been selling of pKLIMA post launch, which obviously raises the question whether early investors still believe in the project, but 1/ the volumes don’t suggest an excessive selling and 2/ this seems the same as a VC selling shares in a startup at the IPO. Some agree with it, some don’t.
aKLIMA: pre-launch crowdfunding via the Initial Discord Offering and Liquidity Building Pool. The IDO price was $10 / KLIMA and the LBP range was $60–$336. These were like a seed and late seed rounds in a startup.
KLIMA: now the DAO has launched and anyone can buy KLIMA. Using the same analogy, imagine the startup went public and listed shares after the late seed. Everyone can trade and we pay a higher price as the risk is now hopefully lower.
Back to the treasury mechanics.
Here is a more detailed look at the different revenue scenarios and what they mean for the DAO.
Expand on scenario 3: If on a given day, the DAO needs to pay 11,553 KLIMA to stakers, but only managed to get 10,000 BCT Revenues, it would effectively need to use up part of its accumulated BCT reserves to mint the additional KLIMA needed. This lowers the backing ratio and also would eat up the reserves, which are supposed to support the current APY. If such a trend persists for longer, the DAO team would need to revisit down the APY in order to balance out its “costs” vs “revenues”.
Expand on scenario 4: The current runway is the metric showing the accumulated revenue reserves at the DAO, i.e. how many days the DAO can pay out staking rewards at the prevailing APY without any revenue. Currently 125 days which will go up more once the APY settles at around 22k. Any day where the DAO books revenues increases the runway.
If the DAO stopped receiving any revenues (i.e. if KLIMA = BCT on the market and there is no premium to pay revenues), there are still revenues from the trading pools — the revenues are not directly flowing in the DAO as they (0.25% transaction fee) are in the form of LP tokens which accrue into the pool and you can monetize by withdrawing the respective tokens against the SLP and selling them. Given the DAO is THE market for its assets (KLIMA and BCT), we have an indication of the total accrued revenue pot in Dune (ca $9m so far).
Klima DAO can potentially use these revenues to pay stakers in case the runway has been fully depleted. If revenues halted today, the accumulated LP revenues would be sufficient for ca 2 days worth of staking rewards at the current staking rewards rate if my calculation is correct.
In the long term when the market / book premium of KLIMA naturally decreases, it would be critical to also include income generating assets in order to supplement the revenues and keep a healthy APY. There are already considerations around renewable assets, direct financing of carbon generating projects, etc.
Investor-friendly dashboard
To make things even more complex, I dumped a bunch of metrics on the dashboard below using data for 12.12.2021. It has a bunch of KPIs, which, I believe make sense, and I wish I knew how to automate it and have it constantly updated.
I hope all of this shed some light on the different aspects of Klima’s economic mechanics.
If you find any mistakes or things that don’t make sense, please yell at me — I probably managed to screw up somewhere with all these numbers.
Take care fellow Klimates.
